As I discussed this past weekend, the current “bull market” seems unstoppable. Even on Twitter, investors have once again been lulled into the “complacency trap.”

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Tracy Alloway
@tracyalloway


The Fed taught the market to buy the dip. Now we do it instinctively...but we've forgotten why. BofaML on astonishing market bounce backs:

I have often written on the perils and pitfalls of investing, portfolio and risk management and the fallacy of long-term “average” rates of returns. Unfortunately, few heed these warnings until it is generally far too late.

For example, just last week I received an email exposing this problem exactly.

“Explain this to me. I have been listening to all of these people on television talking about how great the market is doing. However, my advisor convinced me back in 1998 to buy a bunch of blue chip stocks and just hold them. Well, almost 20-years later, I am not much better off than where I started and am still a long way from where I need to retire. I just don’t get it.”

This email goes to the very core of the fallacy that is continually espoused by the mainstream media with reference to “buy and hold,” “dollar cost averaging,” and “compounding.”

When you are invested in ANY asset that can lose principal value during your investment time horizon, you can NOT compound returns. Compound returns ONLY occur in investments that do not lose principal such bonds, money market accounts and CDs.

Furthermore, the major problem is the loss of “time” to achieve your investment goals. When a major correction occurs in the financial markets, which occur quite frequently, getting back to even is NOT the real problem. While capital can be recovered following a destructive event, the time to reach your investment goals is permanently lost.

The majority of mainstream commentators continue to suggest that “you can not manage” your money because if you sell, then you are going to “miss out” on some level of the bull market advance. The problem is they fail to tell you what happens when you lose a large chunk of your capital by chasing the bull market to its inevitable conclusion. (See “Math Of Loss”)

While investing money is easy, it is the management of the inherent “risks” that are critical to your long-term success. This is why every great investor in history is defined by the methods by which they manage their investments. When they “buy”, but most importantly when they “sell.”